There’s a funny (perhaps unintentionally so) website called The Robing Room, on which lawyers rate judges in various categories. The site is funny mostly because, from reading the reviews, you can generally predict who won and who lost a case before that particular judge. Take, for example, Judge Joseph F. Bianco of the Eastern District of New York. One lawyer-reviewer of Judge Bianco writes: “The judge was extremely fair and reasonable in all pretrial discussions and extremely courteous in oral arguments. He asked questions and let you know what he thought without being abusive or ill-tempered. His decision was thorough and well thought out.” (Winner.) But another lawyer-reviewer writes: “An extremely uncooperative Judge who thinks he is above the law of the Constitution of the United States of America.” (Loser.)
I’m not sure what to do with such conflicting views, but here’s a completely nonpolitical (and not always accurate) comment of my own about researching the background of judges: insurance companies tend to do better with conservatives. From looking at Judge Bianco’s background, I see that he is a Bush appointee, that he’s a former prosecutor, that most of his career has been spent in government service (including as Chief of the Fraud Section of the Justice Department’s Criminal Division), and that he did a stint at a major law firm (Debevoise & Plimpton, LLP) that represents insurance companies. Since judges are people too, and their background can be predictive of their worldview, all of this spells trouble to me when dealing with a coverage case that involves alleged bad acts by the policyholder. As Bernard Baruch supposedly said, if all you have is a hammer, everything looks like a nail. (Disclaimer: I don’t know Judge Bianco, and I’ve never appeared before him. For all I know, my initial impressions are totally wrongheaded.)
So, how would we expect Judge Bianco to handle a recent coverage case involving a policyholder alleged to have participated in a major fraud? Let’s see.
The policyholder (Silverman Neu) is an accounting firm. Two of Silverman’s clients were credit counseling companies that held themselves out to the public as not-for-profit organizations. The credit counseling companies apparently didn’t live up to their advertising, and their owners funneled consumer funds to various for-profit companies to enrich themselves. Silverman got hauled into a resulting class action suit brought by consumers, because the firm had audited the companies and prepared tax documents verifying their (false) nonprofit status. The class plaintiffs alleged that Silverman “knew or should have gained knowledge of” the fact that the credit counseling companies were not legitimate nonprofits. (Emphasis mine.) Note: “Should have known” is a negligence standard, not an allegation of intentional wrongful acts.
Silverman’s E&O carrier, Admiral Insurance, denied coverage for the suit, in part based upon a “Wrongful Acts” exclusion. The exclusion removed coverage for “any liability based in whole or in part on any knowingly wrongful, dishonest, fraudulent, criminal or malicious act committed by or at the direction of any ‘Insured’ in the course of providing ‘professional services.’”
The problem for Admiral, of course, was that pesky negligence allegation. Under the familiar eight-corners rule, if there’s any possibility of coverage, the carrier is supposed to step up and provide a defense. Based on the allegations contained in the complaint, was there a possibility that Silverman wasn’t an active participant in the fraud, but instead negligently overlooked the clues, or was duped by its own clients?
Here’s what Judge Bianco did with that possibility: “Silverman/CNS asks the Court to put the cart (here, the exclusionary provision) before the horse (the coverage provision). That is, if a claim reasonably falls within a policy’s coverage provision, Silverman/CNS suggests that an insurer read no further: It is bound. Continuing the logical implications of Silverman/CNS’s argument a step further, if an insurer examines other provisions of an insurance policy that address the existence and/or scope of coverage, these are not outcome determinative; the only issue is whether the claims fall under the policy’s coverage provision in the first place. Any restrictions or limitations on coverage – even if they potentially or actually affect coverage – do not change an insurer’s obligations. The Court disagrees with that argument.”
No disrespect intended to Judge Bianco, but his logic here is based upon a fairly obvious straw man. The issue is not whether the insuring agreement negates the policy exclusions. The issue is that, unless and until the possibility of (the specifically alleged) negligence is eliminated, there is a possibility of a negligence finding, and the carrier is obligated to provide a defense. That’s hornbook law, which the Court cited earlier in the opinion: “The duty to defend on the insurer’s part remains steadfast, unless the insurer can establish, as a matter of law, that there is no possible legal or factual basis on which the insurer might eventually be obligated to indemnify [the insured] under any provision contained in the policy.’” (Citation omitted; emphasis mine.)
When bad acts are alleged, judges (maybe especially those with a background in the prosecutor’s office) often have a difficult time enforcing insurance policies. The reluctance is understandable, and we saw it in an earlier post on this blog about the horrific Sandusky-Penn State situation. But the concept of liability insurance is actually quite simple. It’s lawsuit insurance, and perhaps it’s most needed when bad acts are alleged and financial devastation is threatened. If there’s any possibility, however slight, that the finder of fact could come back with a verdict within the coverage, then the duty to defend exists. A court’s view of the how the underlying case should come out may be interesting, but it’s also irrelevant, as is the “potential” application of policy exclusions.
You can read the full decision here.